December Analysis January Outlook

2014

By

Lior Cohen

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Introduction Dear Reader,

Thank you for downloading the latest gold and silver market research report. I hopethis report will be interesting for you to read, and provide you with some insight ofthe recent developments in the gold and silver markets during December and someperspective as to what is up ahead in January 2014. I appreciate your feedback, so ifyou have any comments or suggestions don't hesitate to contact me. lior@tradingnrg.com

Thanks, Lior Cohen Tel Aviv. 2nd of January 2014Disclaimer Trading commodities, forex, stocks, options, ETFS etc. (trading) carries a high level of risk and maynot be suitable for all investors. The risk grows as the leverage is higher. Investment objectives, riskappetite and the trader' level of experience should be carefully weighed before entering the tradingmarket. There is always a possibility of losing some or all of your initial investment or deposit, so youshould not invest money which you can't afford to lose. The high risk that is involved with trading mustbe known to you. Please ask for advice from an independent financial advisor before entering thismarket. This report is not and should not be construed as an offer to sell or the solicitation of an offer topurchase or subscribe for any investment. Trading NRG and the authors of this report have based thisdocument on information obtained from sources it believes to be reliable but which it has notindependently verified; Trading NRG and any of its permitted authors make no guarantee,representation or warranty and accepts no responsibility or liability as to its accuracy or completeness.Trading NRG and the authors of this report have not verified the accuracy or basis-in-fact of any claimor statement in this report: Omissions and errors may occur. Any news, analysis, opinion, price quote,forecast and outlooks or any other information contained on this report and Trading NRG's site andpermitted re-published content should be taken as general market commentary. This is by no meansinvestment advice. Neither Trading NRG nor any of its permitted authors, nor its providers ofinformation, have any liability to the user, or any other third party, for the accuracy of any information,analysis, data, outlook or models contained in this report ,on Trading NRG's site, on other sites thathave received permission to republish the content originating on Trading NRG and its reports, or forany errors or omissions therein, nor will Trading NRG or any of its permitted authors or any of itsproviders of information have any liability for the use, interpretation or implementation of theinformation or models contained herein by any person. Trading NRG and any of its permitted authorswill not accept liability for any damage, loss, including without limitation to, any profit loss, whichmay either arise directly or indirectly from use of such information.

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Table of Content

1.1 Preface……………………….……………………..……..…….…...….......Page 1 2.1 Gold and Silver Prices December 2013- Analysis …..…......................…....Page 1

2.1.1 FOMC Monetary Policy – Update …………….…….………....…Page 3 2.1.2 Europe’s Economy – Update…………………..…………….……Page 3 2.1.3 Gold Holdings in December………..………..................................Page 3 2.1.4 Gold & Silver Prices and US Dollar ….………..…........................Page 4 2.1.5 US Treasuries / Gold & Silver Prices – December ….…................Page 52.1.6 Gold & Silver Prices and Other Indexes ……….…..…….…….....Page 6

3.1 Outlook for Gold and Silver Prices – January ………….……...……..……..Page 6Appendix …………………………..………………….…….……..…................Page 9

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1.1 Preface Gold and Silver Prices Outlook for January 2014 The last FOMC meeting of the year ended with a mini-taper of $10 billion so thatquantitative easing 3 will continue to purchase $75 billion a month of LTS andMBS. This decision may have had a moderate adverse effect on the prices of goldand silver. By the end of the month, both precious metals slightly declined.Moreover, on a yearly scale gold and silver tumbled down by 28.2% and 35.9%,respectively. Thus, precious metals recorded their worst annual performance indecades (yes you are reading it right in decades). Looking forward, will gold andsilver continue to tumble on the first month of 2014? Let's examine the upcomingevents, decisions and reports that may affect precious metals; let’s start, however,with a short analysis of December.

2.1 Gold and Silver Prices December 2013

Gold and silver prices declined mostly during the last few weeks of December. Theirdecline did coincide with the depreciation of the Euro, Aussie dollar and Japanese yenagainst the USD. By the end of December, the price of gold decreased by 3.85%; theprice of silver, by 3.3%. Let's divide December into two parts: the table below divides the month at December11th. This point is where the speculations regarding the tapering of QE3 further rose. Idivide the month to demonstrate the shift in pace of gold and silver prices; during thefirst part of December, gold rose by 0.6%; silver, by 1.6%. During the second part ofDecember, however, gold plummeted by 4.4%; silver price, by 4.8%.

During the first part of December, the U.S dollar depreciated against the Euro butslipped against the Aussie dollar, Japanese yen and Canadian dollar; the Euro/USDand USD/Yen currency pairs are usually strongly correlated with gold and silver – inrecent weeks, however, their relation diminished. During the second part of themonth, the Japanese yen sharply depreciated against the US dollar. The chart below presents the changes of gold and silver during December, in whichthe prices are normalized to 100 on November 29th 2013.

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The ratio of gold to silver (gold price/silver price) slightly fell during the month. Theratio decreased as silver price has out-performed gold price. During the month theratio ranged between 61 and 63.

Here are several factors that may have adversely affected gold and silver prices duringthe month:

1. The decision of the FOMC to mini-taper QE3 starting January; 2. In the recent U.S non-farm payroll report, 203k jobs were added – this was

close to estimate and may have slightly dragged down precious metals prices; 3. The higher than expected correction to the U.S third quarter GDP – raised to

4.1%; 4. The sharp depreciation of several currencies such as Aussie dollar and

Japanese yen against the USD during December may have pulled down goldand silver;

5. The approval of the U.S budget lowered the uncertainty of the U.S economyheading towards 2014 with respect to this issue;

6. The decline in the number of U.S jobless claims during December; 7. Most U.S reports were positive: Housing starts sharply rose by 22% during

December; retail sales increased by 0.7%; manufacturing PMI rose to 57.3%;U.S consumer confidence index rose during the month. These reports suggestthe U.S economy is progressing and thus may have dragged down preciousmetals;

8. The ongoing rally of U.S equity markets that serve as an alternativeinvestment for gold and silver;

Here are several factors that may have positively affected gold and silver duringDecember:

1. The decision of the FOMC to maintain its interest rate until the end of 2015; 2. The decision of ECB, BOE, BOC, and RBA to maintain their respective cash

rate flat in December; 3. The appreciation of the Euro against the USD during December may have

curbed down the tumble of gold and silver prices;

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4. The appreciation of the Indian Rupee may have slightly and positivelyaffected the demand for gold in India, among the leading importers of gold;

5. Some U.S reports showed little progress: Philly Fed index remained flatduring December.

The correlation between gold and silver prices strengthened during Decembercompared to November. The correlation reached during December 0.968 – its highestlevel this year. If the correlation remains robust, it could suggest the effect gold hason silver will remain strong.

The standard deviations of gold and silver prices also rose during Decembercompared with their standard deviations in November. This means, the volatility ofgold and silver prices expanded in December.

2.1.1 FOMC Meeting – Update In the recent FOMC meeting the FOMC decided to lower its $85 billion a month assetpurchase program by $10 billion. This news wasn’t the only issue discussed in themeeting. The FOMC members wished to convey to the public that this step oftapering QE3 doesn’t suggest the Fed is likely to start raising its cash rate anytimesoon. The current talks are that the Fed’s cash rate may remain low until late 2015.This news should keep the prices of gold and silver from tumbling any further.Moreover, since QE3 had little positive effect on gold and silver, this might suggest,but not necessarily, that the tapering of QE3 will have little long term adverse effecton the prices of gold and silver (more on that below). The minutes of this meeting willbe released on January 8th and the next meeting, this time under Yellen, will be heldduring January 28-29. If another tapering will be announced, it could have someshort-term adverse effects on precious metals.

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2.1.2 Europe’s Economy – UpdateThe EU economy continues to slowly progress. The ECB’s decision back inNovember to lower the cash rate to its lowest level of 0.25 didn’t stop Euro fromrecovering against the USD. But this rally seems to have had little positive effect onthe prices of precious metals, as indicated by the very weak correlation betweenEur/USD and precious metals (see below). For now, it seems less likely that the ECBwill further reduce its cash rate to 0%.

2.1.3 Gold Holdings during December Germany’s gold holding slightly declined for the first time this year: DuringDecember 2013, its hoards decreased by 3.5 tons. There weren't any other substantialchanges in gold holding among other top gold hording countries. The total global goldsupply reached 31,913.50 tons – a 14.9 tons drop.

Further, by the end of December, gold holding in the commercial gold trust SPDFdeclined again by 5% compared with its gold holding at the end of November. Thecurrent gold holding is set at 801 tons. This is the lowest level in the past severalyears. If this ETF’s gold hoards further fall, it could signal the demand for gold as aninvestment continues to soften. Keep in mind, however, the changes in this ETF isonly a signal for the developments in the demand for gold as investment and doesn’trepresent the entire demand for gold as investment. A note: the linear correlationbetween the shifts in the SPDF holding during the month and the price of gold is, asexpected, strong and positive at 0.57. Thus, if gold price continues to decline, theholding in the SPDF is likely to follow.

2.1.4 Gold & Silver Prices and U.S Dollar Here below are the correlations among major currencies and precious metals prices(up to December 31st):

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The strongest correlations (in absolute terms) with gold price were the followingexchange rates (in brackets are the linear correlation): USD/CAD (0.15), andEuro/USD (0.13); the strongest correlations with silver price were USD/CAD (0.18),AUD/USD (-0.15), and Euro/USD (0.11).

The correlations of precious metals with some of these exchange rates furtherweakened compared to the previous months especially the "risky currencies" such asEuro and Aussie dollar. Thus, these correlations suggest the daily changes in gold andsilver prices were very little related to the shifts in the above-mentioned currenciespairs.

The Indian Rupee slightly appreciated against the USD. This may have partly affectedthe demand for gold and silver; India is second leading country in importing gold.Nonetheless, India’s government decision to increase the tax import on gold hasreduced the demand for gold. But if the Rupee further appreciates, this mightindirectly and positively affect precious metals prices.

2.1.5 US Treasuries / Gold & Silver Prices – December The US 10-year Treasury yields rose again throughout the month. By the end of themonth, the 10-year yield increased by 0.24 percentage points. The chart below showsthe daily changes of gold price and 10 year daily Treasury bills yields duringDecember (up to December 31st). During December, gold and 10-yr yields have had astrong negative correlation with gold and silver.

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In the chart below are the linear correlations between the daily changes of long termU.S treasury bills yields and daily percent shifts of precious metals prices. Thestrongest correlations between yields and gold were in the mid-long term bonds (10years).

For the 10 year bonds the correlations between the yields and precious metals priceswere negative and strong.

The decision of the FOMC to taper QE3 may further contribute to the decline indemand for investments such as U.S LT and precious metals.

2.1.6 Gold & Silver Prices and Other Indexes Let's examine the relation of gold and silver prices with the major indexes includingS&P500 and oil prices during December: During the month, the S&P500 index rallied during the month so that it has out-performed silver and gold. If the S&P500 continues to recover, this may turn investortowards equities and out of gold and silver.

During December, the price of oil (WTI) rose by 6.2% while Brent oil slightly rose by1%. The linear correlation between oil and gold was positive and very weak. Thismeans that while crude oil price (WTI) and bullion prices had similar downwardtrend, their daily percent changes weren’t correlated.

3.1 Outlook for Gold and Silver – January 2014Let’s examine several reports, and events that could affect the precious metalsmarkets: Based on the December report, the U.S employment increased by 203k jobs; thisreport tends to be negatively correlated with gold and silver prices via the U.S dollar.

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The table above shows the dates of the announcements of the U.S. labor report, thechange in employment (column A), and the daily percent changes for gold and silverprices on the day the labor report came out (column B and C, respectively). Thecorrelations among the shifts in precious metals and U.S. employment are mid-strongand negative. In the previous report the expectations were for 130k growth inemployment.

These correlations aren't significant, and may vary over time. The expectations for thegrowth in labor tend to also play a role in affecting gold and silver prices. If the nextlabor report (to be published on January 10th) will show growth of over 160k jobs –and above expectations – this may further pull down gold and silver prices.

The ECB will decide on its cash rate during the second week of January; in the lastECB meeting the cash rate was flat at 0.25%. The current expectations are that ECBwill maintain its cash rate flat.

The FOMC decided to taper QE3 starting January by $10 billion so that the currentasset purchase program will decline to $75 billion a month of long term securities andmortgage backed securities. At the same time, FOMC chairman, Ben Bernanke, in hislast press conference at this capacity, emphasized that the Fed is likely to maintain itscurrent interest rate at its low level until the end of 2015. Therefore, the mini-tapermight have little short-term effect on the prices of gold and silver as the Fed ismaintaining its low rate, which seem to have had a strong long term positive effect onprecious metals. Let’s see why.

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In the table below are the recent FOMC meetings and the shifts in the prices of goldand silver. In the past two decisions gold and silver tumbled down the next day.

The Federal Reserve's QE3 program to purchase long term securities at a monthly rateof $85 billion, and its pledge to maintain its short term interest rates low until mid2015 continues to augment the U.S money base as seen in the chart below.

But the chart above also presents the detachment of gold price’s trend from thegrowth of the U.S money base in year. The linear correlation between these data sets(monthly changes, money base lagged by two months) weakened to reach only 0.13.The sharp rise in U.S money base doesn’t seem to positively affect gold price as itmay have done in the past. Perhaps the fear of inflation has diminished in the pastyear. This also suggests that the mini-taper might not have a strong adverse effect onthe prices of gold and silver, because QE3 had little positive effect to begin with onprecious metals prices.

Looking forward, the minutes of the last meeting will be released on January 8 th andthe next meeting, this time under Yellen, will be held during January 28-29. If anothertapering will be announced, it could have some short-term adverse effects on preciousmetals.

The U.S budget was closed in a deal before the end of the year, but the uncertaintyaround raising the debt ceiling remains. Coming February when the debt ceiling willneed to be raised, safe haven investments such as gold and silver could benefit fromthe debt ceiling debate; as they did in the past.

If U.S. long term Treasury bills yields continues to increase, as they did in recentmonths, they could indicate that traders are taking more risk; thus, more investors are

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exiting bonds market and are getting into riskier investments – this sentiment doesn’thelp the bullion market.

The recovery in the U.S equity markets may have pushed investors away frombullion. If stock markets continue to rally, this may pull down precious metals prices.

The recent appreciation of the Rupee against the USD during the month might havepositively affected the demand for gold. Nonetheless, the India’s governmentintervention by jacking up the import tax has softened the demand for gold.

The correlations among precious metals prices and leading currencies have weakenedin recent months. Thus, if major currencies continue to depreciate against the USD,they might have a moderate adverse effect on bullion prices.

The upcoming minutes of the last FOMC meeting and the first FOMC meeting of theyear could have some short-term effects on the bullion market; especially if theFOMC decides to further cut down its QE3 program. The recent mini-taper had someadverse effect on precious metals prices. Moreover, the positive news on the progressof the U.S economy in employment, GDP, housing and manufacturing may have alsohad a negative effect on gold and silver and a positive one on the U.S equity markets.If equity markets continue to pull up, this could suggest more investors are pullingout of bullion and into equities. The upcoming U.S data on labor, manufacturing, andservices markets will offer insight behind the progress of the U.S economy. If theupcoming reports show positive signs of progress, they might drag further downbullion prices. The ongoing drop in GLD’s gold holdings signals the demand for goldas an investment is softening. Finally, if the demand for precious metals in Indiacontinues to diminish, this could adversely affect the precious metals market. In conclusion, I think gold and silver might start off the month on a positive note tocorrect the sharp drop in prices at the end of the month, but soon after may resumetheir slow descent.

AppendixHere are additional reports that might shortly affect precious metals prices:

Housing Starts– In the December report, housing starts stats spiked by 22.7%; theysuppose to be negatively correlated with gold price (lagged by one day); if in the nextreport, housing starts continue to rise, it may drag down gold price (the next reportwill be published on January 17th);Consumer Price Index – the U.S CPI remained flat in November; the U.S. CPI issuppose to be positively correlated with silver; thus, if the U.S. inflation picks up inthe upcoming January report, this might pressure up silver price (the next report willbe published on January 16th); U.S Manufacturing PMI Survey – the Manufacturing PMI slightly rose again to57.3%, according to the recent December report referring to November – this meansthe manufacturing sectors in the U.S are growing at a faster rate; if this trendcontinues, it could suggest the U.S economy is further growing, which couldadversely affect gold and silver (the next report will be released on January 2nd). In any case, these reports have had moderate and short term effect (at best) on thepath of gold and silver in the past; thus, these reports might continue slightly affectgold and silver rates in the short term.

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